Loans. Lifesavers for many and a living nightmare for many others.
Whether you are taking a personal loan to consolidate existing debt, cater for a major life change, vehicle financing, home remodeling, education or for a big purchase, the biggest consideration that comes to mind is the interest rate.
But, did you know that unsecured personal loan interest rates by commercial banks in Kenya are near-similar at about 13%?
Well, with the removal of interest rate capping in Kenya in November 2019, commercial banks were allowed to take back control of their loan pricing policies albeit under the supervision of the Central Bank of Kenya (CBK).
But we are yet to see the full effect of this, at least until the shift to risk-based lending regime (currently being considered by the CBK) happens.
So, if you thought that the interest rate alone is the biggest factor you should be worried about when deciding which loan to take and from which financial institution, continue reading. There’s more.
TIP: Some banks will allow you to negotiate for a lower interest rate depending on the amount you are borrowing. This will typically be applicable for larger amounts. You should explore this option whenever applicable.
Did you know that in addition to the interest rate, lenders apply additional charges/fees that together add up to the total cost of credit?
While plain interest rates between most commercial banks will be within a reasonable range, the total cost of getting the same loan amount may vary significantly from one financial institution to another when the additional charges are accounted for.
These charges include.
Processing fees: Usually ranging from 2.5% (e.g. Kenya Commercial Bank (KCB) to 5% (Equity Bank)) of the amount borrowed, the loan processing fee is a one-time charge that is used to cater for the administrative costs related to processing your loan.
A customer can either pay it upfront or have it deducted from the loan amount during disbursement - most banks will deduct this upfront when disbursing the borrowed amount.
It is thus wise to inquire from the lender the percentage charged as processing fees among other fees before taking the loan.
Depending on the bank this fee is also known as the loan appraisal fee, or loan application and credit evaluation (L.A.C.E) fee.
Excise Duty: Following the introduction of the excise duty on loan processing fees in the Kenya Budget 2021/22 FY, the lender will deduct 20% of the processing fee from the amount borrowed prior to disbursement.
As such, if the loan processing fee was Ksh3,000 as in the above example, Ksh600 will be deducted as excise duty.
Commitment Fee: Some select lenders in Kenya will charge this fee as compensation for committing to lend to a borrower.
This fee will typically be equivalent to 1% of outstanding balance, chargeable from the first anniversary of the loan - which means only loans with a tenure longer than a year attract this fee.
Some of the banks that charge a commitment fee in Kenya include the Diamond Trust Bank (DTB), Prime Bank.
Monthly loan processing fee: Some lenders will also charge a monthly loan processing fee until the end of the loan tenure. You should ensure you inquire about this to determine how this affects the amount you will end up repaying the bank.
Disbursement fee: Some banks in Kenya such as Sidian Bank will also charge you a one-time upfront fee when loan is disbursed.
Credit Insurance: This is a third-party fee which is a requirement when taking a personal loan. The insurance is meant to pay off the loan in the event of death, permanent disability and in rare cases retrenchment/unemployment.
The credit insurance fee amount will typically be less than 1% of the loan amount borrowed.
TIP: If you strictly need a certain amount of money to enable you meet the purpose of the loan, then it is advisable to borrow more than that exact amount (accounting for the extra charges) so that you receive the exact amount you need. This is because banks will typically deduct the charges before disbursement.
With this in mind, it is advisable for a borrower to be aware of the various fees a lender charges before committing to taking a loan solely on the indicated interest rate alone.
While most of the fees indicated above are charged by many lenders, the percentages may vary significantly. Moreover, some lenders will have their own specific fees that could increase the overall total cost of credit way beyond a lender charging a marginally higher interest rate.
Confused about all this?
Don’t worry, we have already crunched the numbers in our Money254 Loan Comparison Portal, where you can search and compare loans on the total cost of credit. All you have to do is enter the amount you intend to borrow, the disbursement period and the repayment period you are comfortable with.